Standard Costing and Variance
Analysis:

A
standard cost is the predetermined cost of
manufacturing a single unit or a number of
product units during a specific period in the
immediate future. It is the planned cost of a
product under current and/or anticipated
operating conditions.
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Materials quantity standard is also called
materials usage standard. This standard is normally
developed from materials specifications prepared by the
departments of engineering (mechanical, electrical, or
chemical) or product design.

Materials quantity
variance is computed by comparing the actual quantity of
materials used with the standard quantity of material
allowed, both priced at standard cost. If actual quantity
used is more than the standard quantity allowed to produce a
particular number of units, the variance is called
unfavorable materials quantity variance.
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The
price variance for direct labor is commonly termed
as labor rate variance. This variance
measures any deviation from standard in the average
hourly rate paid to direct labor workers.
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more.

Setting direct
labor time or efficiency standard means computing the labor
time required to complete a unit of product. The
establishment of labor time standard or labor efficiency
standard is a specialized function.
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Labor efficiency
variance is calculated by comparing the actual hours worked
with standard hours allowed, both at the standard labor
rate. The standard hours allowed figure is determined by
multiplying the number of direct labor hours established or
predetermined to produce during the period for which the
variances are being computed.

The standard
factory overhead rate is a predetermined rate that is
usually based on direct labor hours. Other bases may also be
used, e.g., direct labor dollars or machine hours.
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The
controllable variance is the difference between
actual expenses incurred and the budget allowance
based on standard hours allowed for work performed.
This variance may be favorable or unfavorable.
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Basically, the
establishment of a standard product cost requires
the determination of price and quantity standards.
In many industries, particularly of the process
type, materials mix and materials yield play
significant parts in the final product cost, in cost
reduction, and in profit improvement.
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Variance analysis and performance reports are
important elements of
management by exception. Simply put, management by exception means that the manager's attention should be directed
toward those parts of the organization where plans are not working out for
reason or another. Click here to read
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Standard costing
system is used by companies worldwide. A comparative
study of cost accounting practices found that
three-fourth of the companies surveyed in the United
Kingdom, two-third of the companies surveyed in
Canada, and 40% of the companies in Japan used
standard costing system. Click here to read
more

The use of standard costs is a key element
in a
management by exception approach. If costs remain within the standards,
Managers can focus on other issues. When costs
fall significantly outside the standards,
managers are alerted that there may be problems
requiring attention.
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